Venture capitalist 3i Plc likes to see itself as a barometer of the UK economy, and with investments in over 1,000 businesses in more than 300 sectors, it is arguably a very accurate barometer. So when total return on investment for the year is down by over 80% to UKP41m (CI No 1,460), UK investment director Derek Sachs seems quite entitled simply to put this down to the reduction in value of the portfolio caused by the changing economic conditions in the UK and the falling value of companies. While Sach acknowledges that 3i can’t do anything directly to affect the conditions in which companies trade, he cites 3i’s commitment to the long term as proof that it will be able to ride economic cycles and continue regardless of changing climates. 3i has a strong presence in the computer sector, having invested UKP31m in 84 companies for the year, and while 3i computer sector advisor Michael Marks has noticed that the industry has not escaped the effects of economic decline, is optimistic that further opportunities still exist.
Optical scanning, support
On the downside, Marks has seen the erosion of margins at distributor level and the virtual disappearance of a native hardware manufacturing base, but reckons that growth in the personal computer market – which he estimates at 27% in unit terms this year – should provide a spur for software developers to come up with marketable programs for the larger base of hardware. Other specific areas in which he expected growth were in the development of optical scanning technology, and in providing end user support for application software. Marks also warned that smaller firms in the sector will have to face up to more competition from abroad, and that 3i would be interested in helping them to come to agreements with larger organisations with a view to providing them with value-added services or products. For those that had identified strong niche or vertical openings, Marks promised that ample capital was still available if they had the right mix of technical, financial and marketing know-how: Marks stressed that 3i wasn’t interested in one-person companies, and if approached by someone with a good idea but without the management skills, would advise them to go out and find them; he noted, however, that good management teams were increasingly difficult to find. 3i’s main business is investment – management buy-outs, buy-ins, start-ups and capital growth projects – but Marks added that another side of the service it provides to its customers is that of match-maker. One of its UK interests badly wanted to get its products distributed in California – Marks happened to know a suitable firm on the West Coast, and a distribution deal was sorted out within 24 hours. That sort of thing is offered as part of the service, but 3i also has a separate mergers and acquisition team that makes money out of funding such activity – and naturally, it is not shy of using its knowledge of the companies in its portfolio to advise in these situations. Marks affirmed however that the emphasis was still on a hands-off approach, and that the starting point for any such deal would be the wishes of the principals. Indeed, 3i may well find that mergers and acquisitions, in one way or another, play a more and more crucial part of its business: in such economic conditions, threats opportunities restructurings and risks are created, Sachs concluded, and 3i will continue to make more investments when others are nervous.